Milk Costs Most in 6 Years as Law Delay Risks More Gains

By Elizabeth Campbell -
Dec 12, 2013

Prices for nonfat-dry milk, the
biggest U.S. dairy export, rose to a six-year high on increasing
overseas demand at a time when Congress’s failure to extend an
expired farm law leaves the threat of surging consumer costs.

The price of nonfat-dry milk averaged $1.9363 a pound in
the week ended Dec. 7, the highest since November 2007, the U.S.
Department of Agriculture said in a report yesterday, citing the
average received by manufacturers surveyed by the agency.
Domestic exporters shipped a record 464,989 metric tons of the
product in the 10 months through Oct. 31, according to U.S.
Dairy Export Council data.

Global dairy prices tracked by the United Nations jumped 22
percent this year, compared with a 3.6 percent drop in overall
food costs. If Congress doesn’t act before year’s end, U.S.
dairy support programs will revert to a 1949 statute that when
fully implemented would double the wholesale price of milk.
Agriculture Secretary Tom Vilsack said cost-raising rules
wouldn’t be implemented in January.

“The big reason for higher prices is a very, very strong
export market,” said Bob Cropp, an economist at the University
of Wisconsin in Madison, who has been following the dairy
industry since 1966. “The world milk supply until this last
fall was running lower than a year ago in many countries, or was
not up much. World demand has stayed very strong.”

Agriculture Prices

Prices for nonfat-dry milk climbed 27 percent this year,
according to government data. Futures of class III milk, used to
make cheese, rose 1.7 percent on the Chicago Mercantile
Exchange, while the Standard & Poor’s GSCI Spot Index of 24
commodities fell 3.1 percent. The MSCI All-Country World Index
of equities jumped 15 percent. The Bloomberg U.S. Dollar Index
of 10 major trading partners gained 3.1 percent.

Dairy prices are climbing at a time when many agriculture
commodities are tumbling after farmers increased grain
production, sending corn and wheat into bear markets. Global
food costs tracked by the UN are 13 percent below the record set
in February 2011. Farmland in the U.S., the world’s biggest corn
grower, is recovering from last year’s drought, the most-severe
since the 1930s.

U.S. corn output will surge to a record 13.989 billion
bushels this year, the government said Dec. 10. Futures in
Chicago slumped 49 percent to $4.3425 a bushel from a record
$8.49 in August 2012.

Asian Demand

China, the biggest whole milk powder buyer, will have a
shortage of raw milk for at least three years after domestic
herds contracted, Macquarie Group Ltd. said Nov. 28. Asian
countries may boost purchases of U.S. and European supplies as
demand for milk products grows faster than output can rise in
main foreign suppliers in Australia and New Zealand, Detlef
Schoen, a managing partner at Aquila Capital, said Dec. 5.

The specter of higher prices still hangs over lawmakers. An
extension of U.S. agriculture subsidies to late January was
rebuffed on Dec. 10 by Senate Democrats, who said they won’t
pass any House plan for temporary funding before Congress breaks
for the holidays. Dairy is the first crop program set to revert
to the 1949 policies if there’s no deal by the end of the year.

Under the law, the government would be required to
stockpile milk until it reached $37.20 per hundred pounds,
almost double the current price of dairy futures traded in
Chicago. The USDA is required to draft rules to implement the
law, which means lawmakers have a window to act, given the
challenges of creating programs based on policies from more than
six decades earlier.

‘Slim Possibility’

The reprieve makes unnecessary a short-term revival of the
most-recent law, which was passed in 2008 and expired Sept. 30,
and should give congressional negotiators time to complete a new
bill, Vilsack told reporters in a conference call yesterday.

The market is not taking seriously the threat of a doubling
of milk prices, said Bill Brooks, a dairy economist at INTL
FCStone Inc. in Kansas City, Missouri.

“It’s very, very, very slim possibility that we’ll see any
kind of increase based upon federal legislation,” Brooks, who
grew up on a Missouri dairy farm and has covered the industry
for about two decades, said in a telephone interview. “It’s on
people’s radar screens, but not from the standpoint that it’s
really going to impact markets any.”

On the CME, milk for December delivery fell 0.6 percent to
close at $18.92 per 100 pounds at 1:10 p.m. in Chicago. Futures
are heading for a second straight quarterly gain.

Record Shipments

U.S. milk exports totaled $5.54 billion in the first 10
months of 2013, up 28 percent from the same period in 2012,
according to Alan Levitt, a spokesman for the Arlington,
Virginia-based export council. The shipments for this year have
already topped an annual record, he said.

The gains for the dry good signal higher costs for the milk
consumers drink as demand increases, said University of
Wisconsin’s Cropp.

The price of fluid or drinking milk is calculated based on
the cost of the nonfat-dry product and the class of the
commodity that is used to make cheese, depending on which is
higher, said FCStone’s Brooks. Nonfat-dry costs have been the
“driving force behind our drinking-milk prices since March,”
because they’ve been higher than the value for the cheese
ingredient, he said.

Fonterra Cooperative Group Ltd. (FSF), the world’s largest dairy
exporter, has said it can’t increase milk-powder production
quickly enough to meet soaring demand from China and other
emerging economies. The gains in consumption are “an
extraordinary situation,” John Wilson, chairman of the
Auckland-based company, said in a statement yesterday.